Understanding what happens to your debt when you die is an important part of estate planning – and you don’t have to be rich to have an estate. Everything you own and owe is your estate. For many people, that includes a home with a mortgage.
The median housing-related debt of a 65- to 74-year-old borrower with a first mortgage, home equity loan and / or home equity line of credit was $ 100,000, according to the U.S. Housing Survey. US Census Bureau in 2019, the latest available results. For homeowners 75 and over, it was $ 75,000.
State and federal laws determine what happens to the home and mortgage when the owner dies. The owner also has a say, as long as he does some basic estate planning, such as creating a will or trust, naming beneficiaries and possibly purchasing an insurance policy. -life.
Your debt doesn’t die with you. Here’s why.
When you die, all of your liabilities and assets, including your home, become part of your estate, which someone then has to pay off. An important part of this process is taking an inventory of everything you own and determining in advance who gets what from heirs and creditors.
If you have a will, you have already chosen an executor to handle this task. If you die without a will or trust, your state’s probate court will appoint someone to settle your estate: usually a spouse, adult child, or next of kin.
Whoever that person ends up being, they will need to know who is named on the deed, who owns title to your house, and whether you have established a living trust or death transfer deed to keep your house out. approval. . This will save your heirs money and simplify the transfer of ownership.
If you’re the sole owner and you don’t have a living trust or deed of transfer on death, but you have a will that passes your house to an heir, for example, here’s what will happen next.
What happens to a mortgage after the house is transferred to an heir?
If your will designates an heir to your home, that person will not have to take over your mortgage until they are co-borrowers or co-signer on your loan. However, federal law does not allow your heirs to take over the mortgage.
If you leave your house to be mortgaged to your daughter, for example, the mortgage manager must honor her request to become the new mortgagee (the borrower). She does not have to qualify and demonstrate her ability to repay the loan. This mortgage assumption rule also applies after the death of a spouse, although many spouses are often co-borrowers on a mortgage and already co-own a house.
Even though mortgages have a term of sale clause that normally requires full mortgage repayment when ownership of the property changes, it does not apply when an heir takes over.
Help the heirs pay the mortgage
The lender will still be able to seize if the deemed heir stops making payments. You may need to provide the heir with a way to pay not only the mortgage payments, but also maintenance, property taxes, and home insurance. If the house is owned by an association, it is also imperative to keep abreast of payments from the homeowners association (HOA).
You can provide these funds by leaving your heir with other assets (such as cash in a savings account payable on death) or by designating them as the beneficiary of a life insurance policy. You can also consider financing a trust with life insurance.
What happens to a house when the owner dies with other debts?
If you die with other debts that cannot be repaid on your estate, state law may require the executor to sell your home to help pay off those debts. If the proceeds from the sale of the home exceed the debts owed, whoever was chosen to inherit your home will receive the excess.
Again, life insurance can help. He can pay off your debts on death so that your heir can inherit your house.
Remember, your estate doesn’t have to pay off your mortgage. Since your mortgage is secured by your home, the mortgage manager can foreclose and sell the home to collect the money owed.
What to do as the heir to a house with a mortgage
If you are the heir or executor of an estate (or both), you will need to take care of the house and the mortgage when the owner dies.
Keep making mortgage payments
It usually takes several months to close a person’s business after death. If you don’t want the home to go into foreclosure while the estate is settling, it’s important to keep making mortgage payments. These payments can come from the estate or from an account that the deceased has designated as payable on his death to the heir. Payments could also come from life insurance proceeds.
Advice: Accounts payable on death do not have to go through a lengthy probate process before the heirs can access the funds. The heir or heirs designated as beneficiaries of the account will be able to use the funds in the account within days of delivering a death certificate to the bank. That said, if the estate has other debts in addition to the mortgage, creditors may have a claim on the assets of an account payable on death.
Pay off the mortgage
Paying off the mortgage after the owner has died is not a rush decision. A mortgage is usually a low-interest loan, and other estate assets or the proceeds of a life insurance policy can be better utilized. Some people buy mortgage protection insurance to pay off the loan when they die, but experts generally say that premiums are better spent on conventional life insurance.
Refinance the mortgage
An heir who cannot afford the mortgage but wishes to keep the house may be able to refinance on a lower monthly payment. Here are some possibilities:
- Ask the mortgage manager for a loan modification
- Refinancing into a longer term loan
- Refinance at a lower rate
The caveat is that refinancing will force the heir to qualify for the new mortgage, so they will need good credit, stable income, and a good debt-to-income ratio (DTI).
Sell the house
If the home has appreciated since the deceased bought it or last took out a mortgage, selling the home may be a good choice, especially if the home has more than one heir.
If the house is worth less than the mortgage balance, the executor or heir will not be able to sell the house unless the lender agrees to a short sale. This means that they will accept a lower selling price than the deceased owed on the mortgage. The heir can continue to make mortgage payments until the house has positive equity, then sell it or allow the lender to foreclose.
Let the lender give up
If the deceased was the sole borrower and resident in the home, and there is not enough equity in the home to make the sale worthwhile, the heir or executor may choose to leave the home. lender foreclose on the house.
However, if an heir has already taken over the loan, or if the loan had a co-borrower or co-signer who is still alive, a foreclosure will have serious consequences on that person’s credit. This includes the difficulty of getting new credit or buying another home for at least two years.
If the deceased had a reverse mortgage and does not have a surviving spouse living in the house, the lender will foreclose and sell the house to pay off the debt, unless the heirs pay off the reverse mortgage. As long as the reverse mortgage is a home equity conversion mortgage (HECM), heirs have the option of paying off the balance of the reverse mortgage or 95% of the appraised value of the house, whichever is less. if they wish to keep the house.
If a HECM foreclosure sale does not fully repay the loan, it doesn’t matter because a HECM is a non-recourse loan. The estate will not have to pay the difference. In a regular foreclosure, the estate could be liable for an impairment unless the home is in a state without recourse.